In my previous post I argued that a decentralized organization structure is most effective for successful strategy execution or implementation. After designing a decentralized structure it needs to be formalized. When an organization has an informal structure, organizational members have few rules or procedures to fall back on during the strategy implementation. Clear procedures, rules and especially responsibilities give managers and employees certainty during the strategy execution effort. However, when a structure becomes too formalized this creates rigidity and inflexibility within an organization. Executives and managers must find the optimal amount of formalization for their organization. Formalizing the structure in an effective and clear way increases strategy execution success
FORMALIZING THE STRUCTURE
After a decentralized organization structure is designed it needs to be formalized. A moderately formalized organization structure supports strategy execution as it creates clarity for organizational members. Clear procedures, rules and especially responsibilities give employees certainty during the strategy execution effort. When organizational members know what they can and cannot do this gives them the security to take decisions on their own in their sphere of responsibility. This stimulates innovative and problem-solving behavior which has a very positive influence on strategy execution performance. While a moderate degree of formalization is very effective for strategy execution, an organization structure should not become too formalized. This is often the case in large and established public organizations that tend to have long and formal decision-making procedures that take a lot of time. Such a high level of formalization discourages new ways of doing things and reinforces the status quo. High formalization reduces the propensity to change. The greater the number of rules and procedures, the greater the rigidity and inflexibility within an organization.
MANY ORGANIZATIONS HAVE AN INFORMAL STRUCTURE
Many organizations have a low level of formalization or informal structure. This is often the case in startups and small and medium sized organizations. Most things are done in an informal way and few things are committed to paper. Matters are arranged by way of mutual adjustment between employees and through direct supervision by founders or managers. As startups tend to be small, communication between employees is frequent and informal. A small organization size with close supervision makes formal rules less necessary. In addition, founders of startups tend to be technically or entrepreneurially focused and have little interest in management activities and matters such as organization structures and procedures. Their mindset is on developing and selling products and services. The way of doing business tends to be informal instead of governed by explicit rules and procedures. Few explicit rules and procedures are established and if they are present, they are often not adhered to. People can easily communicate with each other and coordinate their work as the organization is small in size. As a result, decisions can be made quickly. This is one of the reasons why startups tend to be flexible and are able to quickly act upon market opportunities. There are no formal rules and procedures that slow down decision-making.
While organizations often have a formal structure, they often have an informal structure as well. Such informal structures may be even more important the formal one. This is for example the case when age of family ties take precedence over the formal hierarchy. It may also be the case that the opinion of functional experts are more valued than the head of the business unit they are in. Such an informal structure may create confusion among organizational about who is actually in charge.
CONSEQUENCES OF AN INFORMAL STRUCTURE
While an informal structure has many advantages in startups and small organizations it has disadvantages in larger organizations. A low level of formalization within an organization can have the following consequences for strategy implementation.
Informal structures create uncertainty and confusion. When few things are related to the implementation are formalized, this can create uncertainty and confusion among organizational members. When matters such as implementation activities, procedures, and responsibilities are not formalized, organizational members do not know what they can do and what they cannot do. This is not problematic when tasks are clear and routine and when responsibilities are clearly known. However when executing a new strategy, new tasks are often necessary to implement it and without formal procedures, rules and responsibilities, uncertainty and confusion can arise among organizational members. Moreover, when problems arise during an implementation and responsibilities are not clearly established, organizational members may blame each other. This can create tensions among employees having a negative influence on their willingness to cooperate and share information with each other.
Informal structures reduce continuity. A low degree of formalization can result in problems when organizational members leave during an implementation effort. When there is little written down on paper for the successor to use, this may result in a loss of tacit knowledge and information about the strategy execution. This may result in strategy implementation delays.
Informal structures create uncertainty about who is in charge. In many organizations, the formal power structure often does not really represent the informal power structure. Family and political relationships may play an important role in interactions within and outside of the organization. This may be even more the case in non-Western cultures such as South America, the Middle East and Asia. In such contexts, the informal power structure can be very different from the formal one, and may be considered more important. This creates uncertainty about who is really in charge during an implementation effort creating confusion among employees. In addition, when family or political relationships are dominant within an organization this may take precedence over competence. When personal relationship are considered more important than competence this can have the consequence that not the most skilled person rises to positions of influence but the most connect ones. This can have a very negative influence on the level of competence of employees and managers within an organization. This can be problematic as the availability of competent employees and managers are the most important success factor for strategy execution.
Many organizations are too formalized and rigid. The larger and older an organization is, the formalized it is likely to be. Because of their large size, they are likely to have many layers of management and long and formal lines of communication and decision-making procedures. This can sometimes be seen in large public organizations but sometimes in large multinationals as well. Because such organizations have a monopoly, as in the case of public organizations, or considerable market power, as in the case of multinationals, they tend to get away with their centralized structures with slow decision-making and a lack of innovative behavior. Increasingly are such rigid organization disrupted by lean and mean startups that are able to quickly capitalize on new market opportunities with innovative value propositions.
Balancing informal and formal structure. A moderately formalized structure is most effective for strategy execution. When formalization is low, organizational members have few rules or procedures to fall back on during the strategy implementation. While this may be very flexible and suitable for startups and small organizations, for larger organizations this may create chaos when the organization grows in size. An informal structure becomes problematic in larger organizations. When the number of employees grows they cannot be managed anymore through informal communication or direct supervision. When this happens the organizations becomes uncontrollable. Clear procedures and responsibilities are needed to enable the communication, cooperation and decision-making among many people. However, organizations must not become too formalized and become rigid and resistant to change and innovation. A high level of formalization discourages innovative behavior and fast decision-making and reduces the propensity to change. This creates rigidity and inflexibility within an organization.Executives and managers must find the optimal amount of formalization for their organization.
THE STRATEGY EXECUTION SERIES
This article is 12th part in a 22-part series on strategy execution. This series is based on my PhD thesis on Strategy Execution. My previous posts in this series can be found here.
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ABOUT THE AUTHOR
Dr. Arnoud van der Maas is a consultant, author and speaker in Strategy & Strategy Execution. He is owner of Strataegos Consulting – a strategy consultancy focussed on strategy execution. Received a PhD in Strategy from Rotterdam School of Management – one of the top business schools in Europe. His passion is to empower organizations to better develop and execute their strategy.